What does irc 704 say about losses

Internal Revenue Code (IRC) Section 704 deals with a partner's distributive share of income, gain, loss, deduction, or credit. Specifically, Section 704(b) addresses the allocation of partnership losses. Under IRC Section 704(b), partnership losses are only deductible by the partners to the extent of their adjusted basis in the partnership at the end of the partnership year in which the loss occurred. This means that a partner's share of partnership losses is limited to the amount they have invested in the partnership, including their share of partnership liabilities for which they are considered to bear an economic risk of loss. Additionally, Section 704(d) provides that a partner's distributive share of partnership losses is allowed only to the extent of the partner's adjusted basis in their partnership interest at the end of the partnership year in which the loss occurred. Any losses in excess of this basis limitation are disallowed and carried forward indefinitely until the partner has sufficient basis to absorb the loss. Furthermore, Section 704 also requires that partnership allocations have "substantial economic effect" or be in accordance with the partners' interests in the partnership if they are to be respected for tax purposes. This means that the allocations of income, gain, loss, and deduction must be consistent with the underlying economic arrangement of the partners. It's important to note that other limitations may also apply to the deductibility of partnership losses, such as the at-risk rules under IRC Section 465 and the passive activity loss rules under IRC Section

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